What the Locusts Ate by .@NYTimesFriedman

One of the most troubling features of today’s global economic crisis is the lack of political leadership anywhere. No one has the courage to tell their people the truth. And the truth, alas, is that four of the pillars of today’s global economy — Europe, America, China and the Arab world — have, each in their own way, squandered huge dividends they enjoyed in recent decades, and now they have to dig out of their respective holes with fewer resources, less time and, almost certainly, more pain. There is no easy way out. But, as confronting these hard truths becomes unavoidable, I think we’re likely to see some wild, angry and destabilizing politics that could make the economic recovery even more difficult. Deep holes and weak leaders are a bad combination.

Let’s start with Europe. Greece, Italy, Spain and Portugal all enjoyed a “German dividend.” That is, they enjoyed German-level interest rates as members of the euro zone, even though they were not as productive or disciplined as German savers and workers. Instead of using that dividend to modernize their economies and make themselves more competitive and productive, they went on real estate or consumption binges that have badly weakened either their banks or national balance sheets. Now there is no more escaping the bill.

Chancellor Angela Merkel of Germany decried this “missed opportunity” to overhaul their economies in a speech on Saturday, as reported by Bloomberg News. The lower borrowing rates that came with the introduction of the euro meant “countries like Italy became virtually on a par with Germany in terms of interest rates,” she said. “The freedom created by this situation wasn’t exploited to improve long-term competitiveness. Instead, the time was used to spend too much money in consumption and too little time in tackling reforms.”

Bloomberg quoted Nikolaus Blome, the Bild newspaper’s chief political columnist, as saying that the Greek state “must be rebuilt, like in a developing nation.” “Someone among the euro-zone leaders must finally tell the Greeks the truth: this fresh start can only be achieved with a radical first step,” he said. “And that means leaving the euro.”

The Arab world had 50 years of autocratic rule in which leaders from Libya to Tunisia to Egypt to Syria to Yemen could have gradually ordered reforms from the top down. The military dictators in South Korea and Taiwan used their power surpluses to build export-led economies and educate all their people, creating huge middle classes that gradually took power democratically. But the Arab leaders used their surpluses of power and wealth to ignore the U.N.’s Arab Human Development Report in 2002, which said they urgently needed to overcome their deficits of freedom, knowledge and women’s empowerment. Instead, they enriched a small slice of their populations and distracted the rest with shiny objects, like Israel or populist Nasserism. Now the Arabs have to dig out of this deep hole with fractured political systems and huge youth populations. Who will tell their people that building competitive economies with modern schools will be a huge challenge? The turmoil on the streets of Egypt today is a taste of things to come.

To its credit, China used its huge export dividend to build 21st-century infrastructure and to educate its people, creating a giant middle class. But the current Chinese leadership has not used this surging economic growth to also introduce gradual political reform. Corruption is as bad as ever, institutionalized transparency and rule of law remain weak and consensual politics nonexistent. If growth slows and incomes widen further, more and more steam will build up in that system with no outlet, which is surely one reason Wen Jiabao, China’s retiring prime minister, warned in March that his country had reached “a critical stage.”

Without real “political reform,” Wen added, “it’s impossible for China to fully institute economic reform and the gains we have made in these areas may be lost, and new problems … will not be fundamentally resolved, and such historical tragedies as the Cultural Revolution may happen again in China.” Yikes.

As for America, in the 1990s we enjoyed a peace dividend, a dot-com dividend and a low-oil-price dividend, which combined to sharply reduce the federal deficit. But 9/11, two wars accompanied by tax cuts, not tax increases, a Medicare prescription drug plan and a necessary bailout to prevent a potential depression put us more in debt than ever.

So for Europe, the Arabs, China and America, in different ways, these have been the years the locusts ate. Getting healthy again will be wrenching for all of us. If I were President Obama, I’d focus my entire campaign now on an effort to reforge a “grand bargain” with Republicans based on a near-term infrastructure stimulus tied with a Simpson-Bowles long-term fiscal rebalancing. At a minimum, it would show that Obama has a sensible plan to fix the economy — which is what people want most from the president — and many in business would surely support it. We cannot wait until January to do serious policy making again. We, and the world, need America to be a rock of stability — now.

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What you can take from the article above is that governments and leaders should do two things in order to reach prosperity. First, support a growing middle class in all types of innovation. The support has to include programs that transforms the lower classes into middle classes.
Second, allow for an open society to flourish. You cannot create an innovative middle class without allowing it to fly to wherever it needs to go. Be open, be transparent, be just, be fair, and allow for limitless dreams.